Platforms are eating the world: Platform based businesses poised for explosive growth in 2014

Singapore based Sangeet Paul Choudary writes the blog Platform Thinking, which has been ranked among the top startup blogs for 2012 and 2013 by the HBS Centre for Entrepreneurship. His work has been featured, recommended or quoted in the Wall Street Journal, Harvard Business Review, WIRED, TechCrunch, Fast Company, GigaOm, Forbes, Inc, TheNextWeb, Marketwatch, All Things Digital, Business Insider, The Hindu and several other media. Sangeet is a mentor at 500 Startups, Founders Institute and Techstars Asia (JFDI). He is a contributing author to the book Managing Startups (OReilly Media) and a frequent keynote speaker at leading research labs and conferences including the MIT Media Labs(US), Echelon(Asia) and TheNextWeb(Europe).

You recently wrote an opinion piece on Wired: Platforms are eating the world, which sounds vaguely reminiscent of Andreessen’s famous “Software is eating the world”. You also write a popular blog titled Platform Thinking. Could you explain more about what you mean by Platform Thinking?

Traditionally, Pipes have been the dominant model of business. Firms create stuff, push them out and sell them to customers. The producer and consumer roles are very distinct.

We see pipes everywhere. Every consumer good that we use essentially comes to us via a pipe. All of manufacturing runs on a pipe model. Television and Radio are pipes spewing out content at us. Our education system is a pipe where teachers push out their ‘knowledge’ to children.

There is a linear flow, much like water flowing through a pipe. This is largely because value could traditionally be created only within organization boundaries. This, of course, changes with the internet. Prior to the internet, much of the services industry ran on the pipe model as well.

With the rise of the internet, we are seeing platform business models becoming important. Unlike pipes, platforms do not just create and push stuff out. They allow users (and partners) to create and consume value. At the technology layer, external developers can extend platform functionality using APIs. At the business layer, users (producers) can create value on the platform for other users (consumers) to consume. This is a massive shift from the traditional form of business.

TV Channels work on a Pipe model but YouTube works on a Platform model. Encyclopaedia Britannica worked on a Pipe model but Wikipedia has flipped it and built value on a Platform model. Our classrooms still work on a Pipe model but Udemy and Skillshare are turning on the Platform model for education.

The essence of Platform Thinking is the following:

Your business should connect users with each other and provide the underlying infrastructure on which others can build and exchange value. the iOS-app store is a platform on which apps are created and consumed. Airbnb is a platform on which rooms are made available and booked. Twitter is a platform on which tweets are created and consumed. In all these cases, the business simply connects users and provides them with the underlying infrastructure to build and exchange value.

How does Platform Thinking impact internet startups?

Platform Thinking is different from traditional business thinking. Creation of network effects is more important than simply bringing in users or charging all users to make money. Software and technology are not the end product. Instead, they simply serve as the underlying infrastructure that enable users to interact with each other. Most importantly, users create the value so monetization can be quite complicated. Charging the wrong users can actually diminish the value of the platform since users co-create value. If Facebook were to charge users and some users stopped using it, the value of Facebook to the remaining users would fall as well.

I believe that this is the business model of the future. Ironically, it is a very poorly understood business model. I’ve been obsessed with the way platform businesses work and my goal is to understand and explain management of such businesses.

I write often about this at platformed.info and would specifically recommend the following collection of articles. I also gave a talk about this at the MIT Media Labs, which explains how startups can build platforms successfully.

So Platform Thinking is essentially about disrupting an industry with a fundamentally new business model. What advice would you give to startups and entrepreneurs starting a business today? How can they identify industries that are ripe for disruption?

The best way to identify an industry for disruption is to not do something of that sort at all. Focus on solving a real inefficiency and you’re bound to replace the guys who’re thriving on account of the inefficiency, namely the incumbent. In the process of solving such a problem, the startup often needs to figure out structural characteristics of the industry that give rise to inefficiency, and that can be changed through the new solution.

There are three structural characteristics of industries that are ripe for disruption:

1. These industries have inefficient gatekeepers: Look at the media industry. The entire editorial model is breaking down as community curation tools become more widespread. YouTube changes how we discover new talent. Amazon allows anyone to self-publish. Gatekeepers thrive on controlling market access. The internet just blows that out of the water allowing startups to disrupt such industries.

2. Companies in these industries compete because of privileged access to supply: Just as gatekeepers have privileged access to market demand, some industries have privileged access to supply. Hotels, for example, are the only entities that have spare rooms to let out. Taxi companies are the only ones with fleets of taxis. Both these models have been disrupted by startups that allow anyone to market a spare room or a spare car or even spare space in a car.

3. These industries are extremely fragmented: Internet startups often aggregate highly fragmented industries. Look at what LinkedIn is doing to the hiring industry or what Yelp and OpenTable did to the restaurant or local information industry. This aggregation is typically impossible without the internet and that’s where these startups create unique value.

We’ve seen a lot happening in traditional industries in the last year. Quite a few industries are shaking up. With Nokia and Blackberry’s fall, the shake-up in mobile handsets is finally over. Looking at the future, which industries do you see ripe for disruption in 2014? Why?

There are three industries, in particular, that are ripe for disruption: Education, Legal services and Healthcare. Education has a highly curated supply side. You need a PhD to teach. Platforms like Skillshare and Udemy are trying to change that. The problem, though, is that education as an industry isn’t simply about teaching, it’s also about certification. Certification brings with itself regulatory concerns. These regulations are largely the reason incumbents are able to hold out and counter disruption at this point.

This is a pattern that we see across industries. Legal services, again, is an industry ripe for disruption, being a high value services vertical and one where the majority of the end product can be transmitted digitally. However, industry regulation, again comes in the way and protects the incumbents.

Healthcare, too, can benefit a lot from peer-to-peer connections.

The key challenge for disruptors today, is their ability to ‘hack’ these regulations. We’ve already seen regulations come in the way of disruption in travel/rental (AirBnB) and in transportation (Uber, Carpooling.com).

But this disruption is bound to happen. Regulation typically lags innovation, and we’re currently in a phase where our administrators is still grappling with learning how to regulate platforms.

We all believe in the power of network effects. The fastest growing businesses today – Facebook, Twitter, Uber, Airbnb – all benefit from network effects. However, we do hear the flip side of the many startups that fail with building such businesses. Why do you think most internet platforms with network effects fail and so few succeed?

I believe most such businesses fail because they erroneously believe that their job is to build and ship technology and that technology is the end product. Building technology is definitely a critical part of running an internet startup, but a startup’s work doesn’t end there. Enabling users to create value and interact with each other is an extremely important and poorly understood part of building internet businesses.

Consider Twitter. The technology itself doesn’t provide value. Twitter is a tool to write 140 characters, not much value for anyone using it. The value is in the community and the content it creates. The value of a marketplace, similarly, lies in the network of buyers and sellers, not in the technology itself.

If your business relies on network effects, as a lot of internet startups do, technology alone has no value until a network of interacting users is created.

Secondly, running an internet business with network effects is not just about finding customers for your products, it’s about building interactions on top of your product. This is tricky because there’s always a chicken and egg problem. You need both producers and consumers to interact. Ebay cannot work without sellers. Pinterest cannot work without Pinners. But when a platform starts, there is no one on board. How do you get your first few users when no one else is using it? How do you get sellers without buyers, creators without consumers? This is the classic chicken and egg problem.

So… Build Network Effects… And Focus On Interactions…

Platforms fail because of three points of failure in their attempt to build interactions:

1. They never get a critical mass of users that interact and build value . Most marketplaces, social networks and P2P startups never take off because of a failure to achieve critical mass. I’ve written quite a bit about how one goes about solving this at platformed.info/category/growth-and-revenue/

3. Their monetization depletes value for the community. Think of what advertising does to social networks.

What platform trends do you see emerging in East Asia and which players are you most excited about?

In general, I believe that whenever you connect users together in new and interesting ways and create network effects, you have the opportunity to add additional layers of services and new forms of content/information exchange for these users. Facebook is a great example of this which started as merely a social network to post status updates and today has many different layers that users use. We’re now seeing this happening a lot in East Asia with messaging apps.

Japan’s Line works very well in North Asia because the rich media messaging format works seamlessly out here and is preferred by users, as compared to the plain text interface of other messaging apps. Line has fast transformed from a messaging-first platform to a gaming-first platform. Focusing simultaneously on casual gaming with messaging has helped it gain traction despite the presence of giants like DeNA and Gree. This is a great example of a platform starting out in one category and moving over to another, something that happens very often which also makes it difficult to identify competitors early. When Instagram launched as an innocent photo-taking app, Facebook would never have seen them as competition. That’s probably what happened with Line as well.